Business Breakdowns
· Matt Reustle, Daniel Wu
[00:00:00] S0: And is there anything that artificially caps the e-commerce penetration? When you think about the drivers of that, what would you point to as stopping it from being at the same level as the US, let alone as some of the bigger players? [00:00:00] S1: Yeah, I don't see anything that necessarily is fundamental to preventing e-commerce penetration from getting up to those levels. I think LatAm just started at a lower point compared to the US and as I mentioned, a lot of the infrastructure had to be built out over the past couple of decades and Meli was one of the ones or the main company responsible for doing that. So in many ways I think that's why penetration has been lower compared to the US, but then I don't think the fact that LatAm is an emerging market should put a cap on the potential for e-commerce penetration. Because you look at a country like China where they managed to get to 30% in a very, very short period of time. Now it's going to take longer for LatAm, but we do think that there's a lot more runway to go for E-commerce.
· Daniel Wu, Matt Reustle
[00:00:00] S1: Yeah, I don't see anything that necessarily is fundamental to preventing e-commerce penetration from getting up to those levels. I think LatAm just started at a lower point compared to the US and as I mentioned, a lot of the infrastructure had to be built out over the past couple of decades and Meli was one of the ones or the main company responsible for doing that. So in many ways I think that's why penetration has been lower compared to the US, but then I don't think the fact that LatAm is an emerging market should put a cap on the potential for e-commerce penetration. Because you look at a country like China where they managed to get to 30% in a very, very short period of time. Now it's going to take longer for LatAm, but we do think that there's a lot more runway to go for E-commerce. [00:00:00] S0: And then just on the competitive dynamics, e-commerce is incredibly competitive for periods of time where you will see aggressive land share grab oftentimes sacrificing economics to capture more of the market and then that oftentimes fades away as the industry matures in its respective country or cycles turn. Where would you put Latin America if you need to break it down by country, where would you put that just in terms of the stability of that market share? Maybe looking backwards and then thinking a little bit forwards about their ability to either maintain that share or to grow that share in the future?
· Matt Reustle, Daniel Wu
[00:00:00] S0: And then just on the competitive dynamics, e-commerce is incredibly competitive for periods of time where you will see aggressive land share grab oftentimes sacrificing economics to capture more of the market and then that oftentimes fades away as the industry matures in its respective country or cycles turn. Where would you put Latin America if you need to break it down by country, where would you put that just in terms of the stability of that market share? Maybe looking backwards and then thinking a little bit forwards about their ability to either maintain that share or to grow that share in the future? [00:00:00] S1: Yes, I think the market shares in LatAm, there was certainly a lot of competition during the COVID period, especially from, I guess you call them international e-commerce players that were trying to enter the market. So you've got Shopee, which is Sea Limited's e-commerce arm and you had Temu as well. Amazon's been in the market for a long time and they've got pretty stable market share, I guess you could say relatively negligible for how long they've been in the market for. And then there's a lot of, I guess longer tail e-commerce businesses of physical retailers and they have been the ones that have mainly lost share to the pure play e-commerce players.
· Daniel Wu, Matt Reustle
[00:00:00] S1: Yes, I think the market shares in LatAm, there was certainly a lot of competition during the COVID period, especially from, I guess you call them international e-commerce players that were trying to enter the market. So you've got Shopee, which is Sea Limited's e-commerce arm and you had Temu as well. Amazon's been in the market for a long time and they've got pretty stable market share, I guess you could say relatively negligible for how long they've been in the market for. And then there's a lot of, I guess longer tail e-commerce businesses of physical retailers and they have been the ones that have mainly lost share to the pure play e-commerce players. [00:00:00] S0: You mentioned the intense competition, particularly in the COVID period. What did that look like in terms of having any impact on the business and then thinking about some of that competition that still exists in the market? It's always very interesting to me that to see e-commerce in certain countries or regions and when they can be incredibly competitive and you see very low take rates versus when there is a little bit more stability and take rates come up. So what would you say happened then? And then where does it stand today?
· Daniel Wu
[00:00:00] S1: So in terms of the evolution of e-commerce competition, at least over the past few years, the best example is probably Shopee. The Shopee, which is Sea Limited's e-commerce business, entered Brazil in I think December 2019 as a cross-border marketplace and then it began to build out the local logistics and seller network in 2020. The business competed pretty heavily during those years and I think if you look at the app download data and the monthly active user data, Shopee actually exceeded Meli's monthly active users sometime in 2022. So you could argue that it had actually gotten more traction than Meli despite only being there for a couple of years. Then the business basically went to hibernation during the 2022 global rate hike cycle where Sea basically pulled out of all of their expansion markets except Brazil to focus on their Southeast Asia business. Over the past two years there's been a bit of a resurgence from that business and I think it's really caught the market's attention. When Sea announced that Shopee Brazil was EBITDA positive in the third quarter of last year. And since then, Shopee Brazil has been growing at a pretty healthy clip, taking market share while still remaining profitable. That's the background. Back in June this year, Meli lowered its free shipping threshold from 79 reais to 19 reais, which followed a reduction in their merchant fees in May as well. And this was perceived as a defensive move by the market to stave off Shopee's growing threat, particularly at the lower value end of the market. Now, we'd argue that this is more of a reinvestment decision to drive higher engagement frequency and ultimately longer term growth for the marketplace. Meli has lowered its free shipping threshold twice in the past since launching it in 2017, and each time has led to higher sales and greater logistics efficiency that mitigated much of the cost impact. So this is very much a page out of Amazon's playbook to pass on cost savings to consumers to drive greater scale and lead to additional cost savings. And I think that's generally pretty hard to argue against. Free shipping is a key value proposition for driving e-commerce penetration. So reducing the free shipping threshold and leveraging Meli's superior logistics network should further strengthen Meli's competitive position as the leading Brazilian e-commerce platform.
· Daniel Wu, Matt Reustle
Shopee opened its first Brazilian fulfillment center in September 2024. Meanwhile, Meli expects to finish 2025 with 22 fulfillment centers. So the network scale and service quality is incomparable. [00:00:00] S0: You mentioned just a little bit in terms of Shopee's inflection. In terms of being positive EBITDA on Brazil, is there a way to comp that against Mercado Libre's EBITDA numbers in Brazil? I know they don't break it out, but do you have a sense of profitability in that particular segment, in that particular region? [00:00:00] S1: Yeah. So as I said earlier about the geographic split, the contribution margin in Brazil bounces around 20 to the high teens range, depending on whether the company is reinvesting or not. It's hard to know how much of that is coming from fintech and how much of that is coming from commerce. And Shopee at the moment really only has an e-commerce business in Brazil. We can talk about the potential margin of fintech when we get to that segment. Deep dive. But I think I would say that most of the margin is probably coming from e-commerce at the moment. So you can call it in the mid teens maybe if you allocate the corporate costs to that country as well. [00:00:00] S0: Yeah, quite interesting. And then just going through some of the segments, the marketplace itself, third party versus first party, anything that you can share there. And if there's noticeable difference versus what you've seen with Amazon, which I have some type of mental model. Can you describe a little bit about that segment within the segment?